Iron ore prices are likely to harden in the domestic market in the next few months owing to shortage of the commodity in Karnataka. The supply from Karnataka, about 25 per cent of the national output, is likely to decline if the Supreme Court accepts the recommendations of the Central Empowered Committee (CEC), for putting a cap on production at 30 million tonnes per annum (mtpa).
Presently, iron ore lump prices are between Rs 6,000 and Rs 8,000 a tonne in the domestic market. These are likely to go up by three-four per cent during the current quarter, as there is still good demand in international markets. Prices are Rs 2,700-3,700 a tonne, at the e-auctions in Karnataka. This excludes royalty, forest development tax and transportation charges.
“The demand from China has improved after the start of the new year there. If the Supreme Court accepts the CEC’s recommendations, there will be constraints on supply from Karnataka. As a result, export from the state will dry out completely and it is negative for the domestic steel sector as well,” said Praveen Kumar, chairman, Maya Iron Ores, a derivative commodity brokerage firm.
The CEC recommendation on capping production in Karnataka would have a negative impact on the proposed capacity expansion plans of various steel makers. JSW Steel may have to put on hold their proposed expansion from 10 mtpa to 16 mtpa. Additionally, they will have to source raw material at a higher cost through e-auctions, he said.
New players will have no easy access to iron ore if the apex court accepts the CEC recommendation for halting issue of fresh leases, added Bhavesh Chauhan, an analyst from Angel Broking.
“Ore can be imported from neighbouring states like Chhattisgarh and Orissa into Karnataka. But it would not be economically viable in the long run,” he said.
Continuation of electronic auction of iron ore for two more years is a bad move, as it will lead to rise in prices. “Nowhere in the world is iron ore auctioned. Companies like JSW are able to sustain auctioned ore for the time being as they are not operating the plant to their full capacity. But, in the long run, it is not a viable option for them as well,” Chauhan noted.
The Federation of Indian Mineral Industries (Fimi) has strongly criticised the move to put a cap on production of iron ore.
“Nobody has bothered to consult the mining industry before making recommendations. It would not be in our interest. There will be no new investments in the mining sector and it is an impractical suggestion, as there will be nobody to buy ore fines,” said D V Pichamuthu, director, south, Fimi.
The reauctioning of cancelled leases is not going to help the industry much, as most of these mines have exhausted high quality ore, mining industry sources said.
The only positive outcome from the CEC recommendations was the suggestion for fresh auctioning of cancelled leases. The Karnataka government would stand to benefit from this, as it can expect revenues from auctioning of leases.
